How start-ups are making life easier for the big banks

21 September 2018
| Author: Joanne Frearson

Up until recently the big banks were the undisputed kings of the payments jungle - until a few plucky upstart start-ups emerged to defy the traditional order, creating new products which have made buying things quicker and more convenient.

From mobile banking apps to lending platforms, these new disruptors have been shaking up the market to the shock of the big beasts grown complacent on their own dominance.

Or at least, that was the office narrative. But instead of seeing these new entrants as unwelcome competition, the banks have been turning towards these new players, collaborating with them and absorbing their new approaches.

Breaking new grounds

Barclays has been on the forefront of these new found partnerships, launching its own startup hub for fintechs called Rise. It has offices around the world in London, New York, Tel Aviv, Mumbai, Vilnius and Cape Town.

“We are very positive about working with startups," Nick Kerigan, managing director of Future of Payments at Barclaycard, tells Business Reporter over the phone from the Rise Shoreditch office in London. "The incumbent’s attitudes towards startups are changing,"

“If you back track 24-36 months ago the fintech narrative was [fintechs were] going to disrupt all of these established banks [who felt they didn't] need to work with these fintechs. The narrative is very different now. Banks have acknowledged that fintechs are able to spot opportunity and to be able to create solutions quickly with new technology.

“They are able to explore things sometimes a bank does not have the bandwidth to do. Equally fintechs have acknowledged and identified an opportunity to work with established banks because they have a trusted brand.”

Fintechs have also been benefitting from the sheer size scale of banks, Kerigan explains. They have millions of customers which startups can gain access through partnerships. Banks also know the compliance and regulatory landscape very well.

Payments have been a big focus for start-ups as customer’s expectations have evolved. Kerigan estimates about two-thirds of venture capital funding over the last two years that have gone into fintechs have gone into payments.

“We have seen dramatic changes," he explains. "I have seen more change in payments - certainly in the UK - in the last 10 years that we have may have seen in the previous 1000."

But figuring out what to bet on can be quite challenging, explains Kerigan. Its Rise accelerator programme is a method for Barclays to identify start-ups that understand that the business model in payments is two-sided.

Kerigan says: “If you are creating innovation then you need to figure out a benefit for the consumer, but also figure a benefit for the merchant because it is usually the retailer that will be paying for that service.

“They need to be able to see a commercial benefit of adopting a new way of taking payments whether that is mobile payments. They need to see either if it is going to increase the volume of sales they make or improve their efficiency.

“That means there has to be effectively on both sides a win, win. There also needs to be a win for whoever is providing that service, otherwise that service can’t be sustainable. Without that it is hard to scale a solution in payments, with payments being essentially a highly scaled business.”

In Flux

One start-up which Barclays thinks can deliver this business model is digital receipt firm Flux.

Barclays sponsored Flux, which was founded by the early employees of digital banking alternative Revolut, into the Rise accelerator programme last year.

The bank also funded a proof of concept with the sandwich company Eat which ran through the later parts of last year and early this year.

The idea behind it, Kerigan points out is if you go and buy your sandwich at Eat you will get a digital receipt that appears inside your banking app. “There are many benefits to that from the consumer side as there is no paper you don’t have to carry around the receipts,” Kerigan says.

“In something goes wrong you don’t have to find that receipt that you got 6 months ago. It is much easier to digitise.

“Equally for the merchant they hate having all this paper in terms of receipt roll and reconciling. At the end of day it is a pain and when you think about the environment as well you think about the number of trees that are used in receipts and are just thrown away.

“We got quite excited by Flux, the proof of concept we ran was successful. We are now rolling out a much larger commercial pilot in partnership with them.”

The startup receipt service is now on Barclays Launchpad, an app that has 20,000 customers who are happy to test out new services. Flux has also recently announced they are going to be working with Costa Coffee.

The Mobile Consumer

Kerigan sees demand for mobile payments only increasing. “Consumers like the fact that they are able to make payments through using their smart phones," he says. "Around 85 per cent of us now have a smart phone at home and we are more likely to take it out the house than our wallet.

“[That makes it] convenient to make payments through your mobile phone. Mobile offers a benefit over those contactless cards, for example, the ability to identify where you are when you are making a payment. That is a useful piece of information that you can pull into your app.”

Kerigan foresees a world where payments will be in the background. He explains consumers will only be notified when the payments happen. There will be no need for the customers to struggle around getting out credit cards or cash. The payment occurs automatically.

Barclaycard has been building invisible payment solutions Dine and Dash and launched partnerships with restaurants such as Prezzo, where diners can pay for their meal with mobile apps, with payments automatically deducted from the customer’s bank accounts when they leave. These changes are in response to recognised consumer demand for easier payment methods.

“The main thing that is driving this is the consumer and their expectations around the services experience,” Kerigan says. “Consumers increasingly expect experiences that are convenient.”

Start-ups and banks are not only taking their inspiration from the payment space. They are also building products based on how other industries are digitally transforming to improve the customer experience.

“What we have noticed is that when consumers have expectations for one service they transfer that expectation to another service,” Kerigan says.

“For example, if my electricity company can deliver me all of my bills electronically and let [consumers] control the heating remotely, they'll start to take those expectations into financial services as well.

“You have got this virtuous circle of payment innovation. It is about giving the consumers choice and new ways to pay.”